Fly United to Gartleyville

See the Gartley pattern on the UAL daily chart. You can see the X, A, B, C, and D points clearly marked on the chart. We also formed a Morning Star-like candlestick pattern and closed over the 8ema as well as over the 200sma. We completed the AB/CD within the XA range very close to the 78.6% Fibonacci retracement. Stochastics are mid-range. This is a Bullish set up.

A possible problem with this trade is how price gapped down on relatively high volume into the 78.6% Fib. This is an indication of high momentum to the downside, and it would be more conservative to pass on a trade with this characteristic. The risk is we don't reach our .618AD target before reversing and heading back down. If we get substantial resistance before hitting our target, we should get out early, or at least move our Stop to break even.

Another source of trouble is the possible resistance from the 20sma (green), which we closed directly on today, as well as the 50sma above (red).

Bought a UAL Aug 50 Call for $1.97 just before the market close when the stock was 49.48 and the Delta was 48%.

We'll exit if we violate the Gartley pattern by dropping below the X point at 39.17. If this happens, we'll monitor this chart for the formation of a Butterfly pattern.

Targeting the .618AD level, which is 42.56+.618(63.70-42.56)  = 55.62

Summary:

Entry 49.48 (Call option $197)

Stop 39.15 (shaded by 2 cents)

Target 55.60 (shaded by 2 cents)

By Stock:

Risk: 49.48-39.15=10.33

Reward: 55.60-49.48=6.12

By Option:

The Delta was about 50%. $10.33 stock risk * 50% = $5.17, but risk is capped at the cost of the option, which is $1.97. Reward is about 6.12 * 50% = $3.06. So, for our option position,

Risk: 1.97

Reward: 3.06

R:R = 3.06/1.97 = 1.6:1 which isn't great but hitting the 61.8% Fib as a target on a Gartley pattern is a high probability trade, at least in my experience. So this R:R is acceptable.